What is FINRA arbitration?

FINRA arbitration is a method of resolving disputes between investors and brokerage firms or financial advisors outside the court system. It involves a neutral third party, an arbitrator, who reviews the case and makes a binding decision.

Why choose arbitration over litigation?

Arbitration is typically faster, less formal, and more cost-effective than litigation. It also provides a final resolution to disputes, with limited grounds for appeal. Most relationships with financial advisors are formalized by entering into a contract which contains a dispute resolution clause. Nationally, most dispute resolution clauses provide for FINRA arbitration.

Who can file a FINRA arbitration claim?

Investors, brokerage firms, and financial advisors can file a FINRA arbitration claim if they have a dispute related to securities or investment activities. FINRA arbitration is normally the forum for disputes among registered persons, brokerage firms and the public customer clients of the firms.

How do I start the FINRA arbitration process?

To start the arbitration process, Bakhtiari & Harrison will file a Statement of Claim with FINRA, detailing the nature of the dispute, the parties involved, and the relief sought.

What is a Statement of Claim?

A Statement of Claim is a written document submitted by the claimant outlining the facts of the dispute, legal claims, and the desired outcome.

What happens after filing the Statement of Claim?

After filing, the respondent has 45 days to answer the Statement of Claim. The answer must address the claims and may include counterclaims or other relief sought.

What fees are involved in FINRA arbitration?

Fees include filing fees, hearing session fees, and possibly member surcharges or process fees, depending on the specifics of the case.

Can I represent myself in FINRA arbitration?

Yes, you can represent yourself, but many choose to hire an attorney with experience in securities arbitration due to the complexity of the process. Investors and industry professionals who choose to represent themselves do so at a substantial disadvantage, Wall Street firms typically retain experienced professional counsel to represent their interests.

How are arbitrators selected?

Arbitrators are selected through the Neutral List Selection System (NLSS), which provides a list of potential arbitrators. Both parties rank and strike names to agree on a panel.

What qualifications do FINRA arbitrators have?

FINRA arbitrators include attorneys, accountants, financial professionals, and public members who have undergone training and meet FINRA’s qualification standards.

How long does the arbitration process take?

The process typically takes 12-18 months from filing to the final award, but this can vary based on case complexity and scheduling. Preference may be given to investors that are seriously ill or elderly.

What is a prehearing conference?

A prehearing conference is a meeting between the parties and the arbitrators to discuss procedural issues, set a schedule, and address preliminary matters including final FINRA arbitration hearing dates.

What is discovery in arbitration?

Discovery is the exchange of documents and information between the parties to prepare for the hearing. It is more limited than in litigation.

What happens during the arbitration hearing?

During the hearing, both sides present evidence, call witnesses, and make arguments. The arbitrators then deliberate and render a decision.

Is the arbitration hearing open to the public?

No, arbitration hearings are private and confidential. Only the parties, their representatives, and the arbitrators may attend.

Can I settle my case before the hearing?

Yes, parties can settle at any time before the arbitrators render a decision, often through negotiation or mediation.

What is mediation in the context of FINRA arbitration?

Mediation is a voluntary process where a neutral mediator helps the parties negotiate a settlement. It is separate from arbitration and non-binding.

What happens if I lose in arbitration?

If you lose, the arbitrator’s decision is final and binding. There are limited grounds for challenging the award in court.

Can I appeal an arbitration decision?

Generally, you cannot appeal an arbitration decision. However, you can seek to vacate the award on very narrow grounds, such as arbitrator misconduct.

What types of disputes are resolved through FINRA arbitration?

Disputes include claims of fraud, breach of fiduciary duty, negligence, breach of contract, and other issues related to securities and investments.

How are damages determined in arbitration?

Damages are determined based on the evidence presented, including financial records, expert testimony, and the specifics of the case.

Can arbitrators award attorney’s fees?

Arbitrators can award attorney’s fees if provided for by law, contract, or if both parties request it.

How do I enforce an arbitration award?

An arbitration award can be enforced in court through a confirmation process, making it a judgment that can be collected.

What is expungement in FINRA arbitration?

Expungement is the process of removing information from a broker’s record on the Central Registration Depository (CRD) system. It is only granted under specific conditions.

What are the grounds for vacating an arbitration award?

Grounds for vacating an award include arbitrator bias, fraud, corruption, or misconduct, as well as exceeding their powers.

Are arbitration awards public?

Yes, arbitration awards are published on FINRA’s website, providing transparency and access to past decisions.

What is the role of the Office of Dispute Resolution?

The Office of Dispute Resolution administers arbitration and mediation cases, ensuring that the process runs smoothly and efficiently.

What is a Simplified Arbitration?

Simplified Arbitration is for cases involving claims of $50,000 or less, allowing for a quicker and less expensive resolution without a hearing.

Can I request an expedited hearing?

Yes, in certain circumstances, such as elderly or seriously ill parties, you can request an expedited hearing.

What is the role of an arbitrator?

An arbitrator acts as a neutral decision-maker, reviewing evidence, hearing testimony, and issuing a binding decision on the dispute.

How do I prepare for an arbitration hearing?

Preparation involves gathering evidence, preparing witnesses, and developing a clear case strategy to present to the arbitrators.

What types of evidence are admissible in arbitration?

Evidence can include documents, emails, financial records, expert reports, and witness testimony, subject to the arbitrators’ discretion.

Can I request documents from the other party?

Yes, through the discovery process, you can request relevant documents and information from the other party to support your case.

How does FINRA handle conflicts of interest with arbitrators?

FINRA requires arbitrators to disclose any potential conflicts of interest, and parties can object to arbitrators they believe are biased.

What happens if a party does not comply with discovery?

If a party does not comply, the other party can file a motion to compel, asking the arbitrators to order compliance and possibly impose sanctions.

What is a motion in arbitration?

A motion is a formal request for the arbitrators to make a ruling on a specific issue, such as compelling discovery or dismissing a claim.

Can I request interim relief in arbitration?

Yes, you can request interim relief, such as temporary restraining orders or injunctions, to preserve the status quo pending the final decision.

How are hearing locations determined?

Hearing locations are typically determined by the location of the claimant unless both parties agree to a different venue.

What is a telephonic or virtual hearing?

Telephonic or virtual hearings are conducted via phone or video conference, allowing parties to participate remotely.

How are arbitration awards paid?

Awards are typically paid by the losing party within 30 days of the decision, unless otherwise specified by the arbitrators.

What if the losing party does not pay the award?

If the losing party does not pay, you can seek enforcement through the courts, turning the award into a legally enforceable judgment.

Are there any limits on the types of claims I can bring in arbitration?

FINRA arbitration covers a broad range of claims related to securities, but there are some statutory and regulatory limits on certain types of claims.

Can I bring a class action in FINRA arbitration?

No, class actions are not permitted in FINRA arbitration. However, you can join other claimants in a single arbitration if the claims are similar.

What is the role of expert witnesses in arbitration?

Expert witnesses can provide specialized knowledge and opinions to help explain complex financial issues to the arbitrators.

How are hearing dates scheduled?

Hearing dates are scheduled based on availability of the parties and arbitrators, with consideration for the complexity of the case.

Can I request a different arbitrator if I believe one is biased?

Yes, you can challenge an arbitrator if you believe they have a conflict of interest or bias that affects their impartiality.

What is a “chairperson” in a FINRA arbitration panel?

The chairperson is the lead arbitrator who manages the procedural aspects of the case and ensures the hearing runs smoothly.

How does FINRA ensure fairness in arbitration?

FINRA has rules and procedures in place to ensure a fair and impartial process, including arbitrator training and disclosure requirements.

How do I learn more about the FINRA arbitration process?

For more information, you can visit FINRA’s website, contact their Office of Dispute Resolution, or consult with experienced attorneys like those at Bakhtiari & Harrison.

How can Bakhtiari & Harrison help with FINRA arbitration?

Bakhtiari & Harrison can assist with filing claims, responding, selecting arbitrators, discovery, hearings, and ensuring the best possible outcome through skilled representation and strategic advice.

FINRA Suspends Ex-Rep Over Regulation Best Interest Violations

The Financial Industry Regulatory Authority (FINRA) has suspended broker Joseph Desapio for 15 months due to violations of Regulation Best Interest (Reg BI). Desapio’s misconduct involved recommending unsuitable trades in four accounts held by three customers, one of whom was over 70 years old. This case underscores the critical role of compliance with Reg BI and the importance of safeguarding investors’ interests. At Bakhtiari & Harrison, our securities attorneys are dedicated to helping clients navigate such regulatory challenges.

Background of the Case, Spartan Capital Representative

From June 2017 through June 2021, Joseph Desapio recommended “quantitatively unsuitable trades” in four accounts. During this period, he was registered as a general securities representative (GS) through Spartan Capital Securities LLC. His actions resulted in excessive trading, leading to high turnover rates and cost-to-equity ratios that significantly exceeded traditional benchmarks of six and 20 percent, respectively.

Unsuitable Recommendations and Excessive Trading

Desapio’s clients included a 58-year-old paralegal, a 57-year-old widowed yoga instructor, and a 71-year-old insurance agent. These customers relied heavily on Desapio’s advice and routinely followed his recommendations, giving him de facto control over their accounts. As a result, Desapio’s trading generated substantial costs and losses for his clients, which were not aligned with their investment profiles.

For example, in the 71-year-old insurance agent’s account, Desapio recommended 131 transactions, leading to an annualized turnover rate of 12 and an annualized cost-to-equity ratio of 72%. The total trading costs in this account amounted to $27,527, including $19,778 in commissions, and resulted in $24,454 in realized losses.

Additional Violations and Termination

In addition to the unsuitable trading practices, Desapio borrowed $20,000 from one of his customers in September 2019 without Spartan’s prior approval, violating FINRA Rules 3240 and 2010. Spartan Capital Securities filed a Uniform Termination Notice for Securities Industry Registration (Form U5) on July 27, 2022, terminating Desapio’s registration. The Form U5 noted that an arbitration had been filed against Desapio, alleging that he borrowed money and executed a promissory note for funds from a customer, and that he owed the firm $22,992.38.

Although Desapio is no longer registered or associated with a FINRA member firm, he remains subject to FINRA’s jurisdiction.

Ensuring Compliance with Reg BI

The suspension of Joseph Desapio highlights the importance of adhering to Reg BI, which requires brokers to act in the best interest of their clients when making investment recommendations. At Bakhtiari & Harrison, our securities attorneys are committed to helping financial professionals understand and comply with regulatory requirements to protect their clients and their careers.

Key Takeaways for Financial Professionals

Understand Client Profiles: It is crucial to fully understand the investment profiles of your clients and ensure that all recommendations align with their financial goals and risk tolerance.
Avoid Excessive Trading: Excessive trading can lead to high costs and losses that are not in the best interest of clients. It is essential to maintain reasonable turnover rates and cost-to-equity ratios.
Adhere to Borrowing Rules: Always seek prior approval from your firm before borrowing money from clients to avoid violations of FINRA rules.
Document and Review: Maintain thorough documentation of all client interactions and review recommendations regularly to ensure compliance with Reg BI and other regulatory standards.

Contact Bakhtiari & Harrison for Expertise in FINRA Matters invovling Spartan Capital

If you are a financial professional seeking guidance on compliance with Reg BI or facing regulatory challenges, contact Bakhtiari & Harrison. Our team of experienced securities attorneys is dedicated to providing the support and representation you need to navigate these complex issues. Visit our website or call us today to learn more about our services and how we can assist you.